Cable television companies are entering the telecommunications market by upgrading their networks with fiber optics and installing facilities to provide fully interactive transmission of broadband, voice, video and data communications. Electric utilities have existing assets and access to low cost capital that could allow them to enter a market rapidly and accelerate network development.

Voice over internet protocol service is increasingly being embraced by all industry participants. Voice over internet protocol service essentially involves the routing of voice calls, at least in part, over the Internet through packets of data instead of transmitting the calls over the existing telephone system. While current voice over internet protocol applications typically complete calls using incumbent local exchange carrier infrastructure and networks, as voice over internet protocol services obtain acceptance and market penetration and technology advances further, a greater quantity of communication may be placed without the public switched telephone network. On March 10, 2004, the Federal Communications Commission issued a Notice of Proposed Rulemaking with respect to internet protocol-enabled services. Among other things, the Federal Communications Commission is considering whether voice over internet protocol services are regulated telecommunications services or unregulated information services.

The Internet services market is also highly competitive, and it is expected that that competition will continue to intensify. Internet services, meaning both Internet access (wired and wireless) and on-line content services, are provided by Internet service providers, satellite-based companies, long distance carriers and cable television companies. Many of these companies provide direct access to the Internet and a variety of supporting services to businesses and individuals. In addition, many of these companies offer on-line content services consisting of access to closed, proprietary information networks. Long distance companies and cable television operators, among others, are aggressively entering the Internet access markets. Long distance carriers have substantial transmission capabilities, traditionally carry data to large numbers of customers and have an established billing system infrastructure that permits them to add new services. Satellite companies are offering broadband access to the Internet from desktop PCs.

The Company primarily generates revenue through the provision of the Company’s basic local telephone service to customers within the Company’s service areas, the provision of network access to interexchange carriers for origination and termination of interstate and intrastate long distance phone calls, Universal Service Fund—high cost loop payments and the provision of other services such as long distance resale, data and Internet and broadband enabled services, enhanced services, such as caller name and number identification, and billing and collection for interexchange carriers.

Local calling services include basic local lines, private lines and switched data services. The Company provides local calling services to residential and business customers, generally for a fixed monthly charge. In an rural local exchange carriers' territory, the amount that the Company can charge a customer for local service is determined by rate proceedings involving the appropriate state regulatory authorities.

Network access charges relate to long distance, or toll calls, that typically involve more than one company in the provision of telephone service. Since toll calls are generally billed to the customer originating the call, a mechanism is required to compensate each company providing services relating to the call. This mechanism is the access charge and the Company bills access charges to long distance companies and other customers for the use of the Company’s facilities to access the customer, as described below.

Local calling service revenues increased $5.6 million from $41.7 million in the nine months ended September 30, 2003 to $47.3 million in the nine months ended September 30, 2004.

Operating expenses increased $14.8 million to $96.4 million in 2004 from $81.6 million in 2003.

Depreciation and amortization increased $0.7 million to $36.9 million in 2004 from $36.2 million in 2003.

Income from operations increased $1.6 million to $55.5 million in 2004 from $53.9 million in 2003.

Total other expense increased $10.5 million to $68.8 million in 2004 from $58.3 million in 2003.